Why Did Economists Get GDP Wrong?

Gross domestic product was expected to be weak in the fourth quarter, but no top economist thought that the change from the prior period would be negative. What did they miss?

Basically, economists correctly predicted the negative aspects of the report—but they underestimated how negative they’d be. Stephen Stanley of Pierpont Securities summed up the big drags: “Inventory accumulation slowed from $60 billion in [the third quarter] all the way to $20 billion in [the fourth] (I had $33 billion). This subtracted 1.3 percentage points from growth (I had projected a 1.0 percentage point drag). Second, federal defense spending unwound the [third-quarter] spike with a vengeance. Defense outlays sank at a 22% annualized clip in [the fourth quarter], driving a 15% drop in overall federal outlays in real terms. This component also subtracted 1.3 percentage points from GDP growth in [the fourth quarter], about 0.4 percentage points more than I had anticipated.”

It is interesting, though, that none of the 24 economists surveyed for the Dow Jones consensus estimate forecast a negative print. The median expectation was for 1% growth in the fourth quarter with estimates ranging from 0.3% to 2%.

But economists also are notoriously bad at seeing negative quarters coming. In September 2008 the U.S. was finishing its first quarter of contraction in the Great Recession, but the Wall Street Journal’s survey of economists was expecting 1.2% growth. Just three of the 50 respondents that month expected a negative print when the official data were released a month later.

Of course, the fourth quarter 2012 percent change also was barely negative with a 0.1% drop. That’s not a very far cry from some of the lower forecasts. There also is a significant chance that when the final numbers come in, the fourth quarter could wind up in the positive column. The GDP number released today is just the advance estimate, there are two revisions before the Commerce Department settles on its final number. The third quarter of 2012 was initially reported to have recorded 2% growth but by the time the final number came out it was up to 3.1%.

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